Handout Chapter 12

SITUATION 1: KEEP OR DROP A PRODUCT / SEGMENT

Belair Bistro is a French bistro located in Yorkville. The Bistro is essentially made up of a sit down bistro
with service and a daily menu for lunch and dinner while the front of the restaurant is a take-out bakery
and café.

For the past 2 years, Belair has been operating an online platform through their website that allows
customers to place orders on-line and have the food delivered to them within 45 minutes. The Online
delivery platform is managed from a small office located at the back of the restaurant. Belair’s
manager, Mr. Gabriel, is considering dropping this segment as he believes it is not profitable. The
maintenance of the IT platform has been expensive and he also believes that the online orders take up a
significant portion of his time while making up a small portion of the revenues. Gabriel believes his
time could be put to better use with other projects and initiatives for the Bistro as well as managing the
current operation. Gabriel indicates that staff turnover has been higher this past year and he feels
partly responsible as he has not been able to be as involved with supervising and coaching the staff.

The feedback from the platform has been generally good and he noted that many new customers of the
café indicated that they discovered the café after they saw the website and ordered delivery from the
online platform.

Gabriel, provides you with the following financial information of the Bistro and asks you to help him
decide whether they should keep or drop the Online Delivery Segment.

BELAIR BISTRO - SEGMENTED INFORMATION

TOTAL BISTRO CAFÉ ONLINE/DELIVERY

Sales 1,680,250 1,125,000 341,250 209,000
Variable Costs 1,060,500 689,000 204,700 166,800
Contribution Margin 619,750 436,000 136,550 42,200
CM % 37% 39% 40% 20%
Fixed Expenses
Salaries 226,850 189,250 25,600 12,000 1
Advertising 10,000 7,500 - 2,500 1
Utilities 24,500 18,375 3,675 2,450 2
Depreciation 55,000 41,250 8,250 5,500 2
Insurance 12,000 9,000 1,800 1,200 2
Manager Salary 70,000 42,000 10,500 17,500 3
IT Maintenance - Delivery
Platform 16,000 - - 16,000
205,400 128,625 86,725 (14,950)

Note 1: The Salaries and Advertising expenses are direct and traceable costs of each segment.
Note 2: These common fixed costs were allocated based on the square footage of the building occupied
by each segment.
Note 3: Gabriel indicated that he estimates he spends 60% of his time working at the Bistro, 15% for the
café, and 25% for the online delivery platform. His salary was allocated based on this basis.

©Rotman School of Management – authored by Catherine Barrette

REQUIRED:
Identify the relevant costs to the drop analysis and prepare a computation of the loss/gain in income
that would result from dropping the segment.
many fixed costs are shared among segments - utilities, depreciation, and insurance
- even if the online segment was dropped, we cannot get rid of the fixed expenses

- salary and advertising are direct and traceable

- directly traceable to Online segment — avoidable

Costs that can be directly traced to online costs

- variable costs, CM margin
- If drop, would lose CM of 42,200
- avoid salary and ad. 14,500
- mger salary - if cancel manager would still need to work on the other segments
- not avoidable
- avoid IT maintenance delivery

lost: 42,200
Avoidable = 14,500+16,000 = 30,500
Net change = (42,000) + 30,500 = (11,700) —> decrease in overall NI

—> if drop we would lose more than we gain from avoiding the fixed costs

What qualitative factors would you consider in this decision?

pro:
online segment brings in more clients
positive feedback on the online deliver

con:
other segments are more efficient (higher CM ratio)
- Manager can spend more time on the other segment
high staff turnover - can lower morale if focusing on online segment

©Rotman School of Management – authored by Catherine Barrette

SITUATION 2 – MAKE OR BUY A PRODUCT

Pierre, the pastry chef of Belair Bistro indicates that he has been approached by Le Louvre Bakery. Le
Louvre indicated that they could bake all of the 150 croissants the café needs on a daily basis for a cost
of $1.15 per croissant. Pierre is considering this offer as croissants are very time consuming. They
take on average 3 hours of his time to make each morning. He feels that he could use this time to make
some pies and cakes that can be sold at the café.

Pierre has summarized the information from the offer below:

Offer from Le Louvre:

 To bake 150 croissants each day at $1.15 per unit.
 A daily delivery charge of $40 would be applied.
 Any change to the quantity ordered needs to be communicated at
least 48 hours in advance.
 The current terms are valid for 1 year, at which point the
contract can be renegotiated.

The current direct materials of making the croissants is $0.95. The variable overheads associated with
the croissants are estimated at 10 cents per croissant. Pierre is not paid on an hourly basis, so cutting
the croissant line would not affect the salary expense.

Pierre believes that he could make 25 pies with the time he would save. On average, the pies would
provide a contribution margin of $3.5 per pies. Pierre is very excited about this opportunity as he feels
that making pies allows him to be much more creative than making croissant. Pierre also indicated that
the croissants use a special oven that could be sold as it would no longer be needed. The oven was
purchased 6 years ago for $8,500. However, as there is not a large re-sale market for used bakery stove,
they could only get $2,500 if they sold it today.

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©Rotman School of Management – authored by Catherine Barrette

REQUIRED:
Identify the relevant costs to the make or buy decision of the croissants.

- cost of the contract

- cost of making
- selling oven
- baking pies

less costly to buy

$32.5 less to buy
- opportunity to get 2,500 from selling the oven

What qualitative factors would you consider in this decision?

- margin is very low - only $0.10 for each croissant
- may not be wise to sell the oven
- contract is only for one year
- contract requirements
- unable to control the quality of the croissants

©Rotman School of Management – authored by Catherine Barrette

SITUATION 3 – UTILIZATION OF A CONSTRAINED RESOURCE

Belair Bistro identified that the café’s main bottleneck is Pierre’s time. If Pierre, the pastry chef, could
work additional hours, the café would be able to have more baked goods to sell.

The manager is currently reviewing the quantity of each item that should be produced on a daily basis.
During the afternoon, Pierre usually spends his time baking macarons and quiches. Everyday, the café
sells out of the boxes of macarons and quiches. The demand for both product therefore far exceed the
daily production of the café.

The following information about the products is provided to you by the manager:

Box of 12 macarons Quiche

Selling Price per unit $30 $18
Variabel Costs $18 $15
Contribution Margin $12 $3

Chef Pierre explained that the macarons are an art and require a lot of time and precision to make. He
therefore spends 18 minutes of his time on each box of 12 macarons while a quiche only requires 8
minutes of his time.

REQUIRED:
Which item should be prioritized by Pierre in order to ensure that Belair has the highest profit?

©Rotman School of Management – authored by Catherine Barrette